1/12/2009 @ 4:00PM

Where U.S. Home Sales Are Rising

Something funny’s happening in Las Vegas. Home sale prices from last year are down 28%, but home sales are up 15%.

The reason? Motivated sellers–those in distress or foreclosure–or banks with too many homes on the books are slashing asking prices in order to unload their properties. Motivated sellers in Las Vegas accounted for 64% of sales in October, the highest rate in the country according to Radar Logic, a New York-based derivatives firm that provided the data for this story.

That means buyers are getting deals and hastening Las Vegas’ recovery. In fact, buyers are eating up inventory fast enough that the discounts offered by motivated sellers are tightening as supply contracts. The difference between what motivated sellers have to offer and what non-motivated sellers can command has held steady for three months at a 17% discount, versus the 33% national average. So while it’s still a buyers’ market, prices have dropped to a level that’s stimulated demand.

“There’s a pretty active housing market, it’s simply at a lower-priced inventory,” says Michael Feder, chief executive of Radar Logic. “And there are now bidding wars taking place over homes in foreclosure.”

Other cities are experiencing the same. In markets flush with motivated sellers, such as Phoenix and San Diego, transactions are up 10% and 90% respectively, as buyers are starting to compete for available deals.

All are bright spots in an otherwise dark economic climate. While in many cities, potential homeowners are waiting to see how low prices will fall before buying, in places with highly motivated sellers, prices have dropped far and fast enough to rekindle sales. While foreclosures continue to rise, and
Credit Suisse
estimates 8.1 million more of them through 2012, financially solvent buyers are finding good deals at price points and mortgages they can afford.

“We’re clearing out the bad news,” says Kiva Patten, a director at
Merrill Lynch
specializing in housing derivatives. He says that continued price drops and uncertainty have kept many out of the marketplace but that some markets have reached a price level that’s drawing in buyers. “If everyone is expecting bad news, when you get the bad news, and it’s out of the way, that’s good. Individual buyers start to come back into the marketplace.”

It’s easy to understand an uptick in motivated sales. Banks that have repossessed homes in foreclosure and homeowners with soon-to-reset loans are ever more eager to get out of the market. Especially with rising unemployment, now at 7.2% up from 4.9% from a year ago, banks’ balance sheets and individuals’ cash flows are threatened.

One good thing about the hurried sell-off is that in some cities, like Los Angeles, the difference between what motivated sellers have to accept and what non-motivated sellers are taking has narrowed. A falling discount doesn’t mean a price recovery is around the corner, but it does suggest a stabilizing market. In March of 2008, L.A.-area motivated sales prices were 25% below non-motivated prices. Now, that’s dropped to a 22% discount. However, even if prices flatten and hit the proverbial bottom, don’t expect a sharp, fast v-shaped recovery.

“By the end of 2010, that’s where we’re calling the bottom in the forward market. You’re going to get a small price appreciation in 2011,” says Patten. “It’s not like the turn is 10% per year, it’ll be something like 3% or 4%.”

Others aren’t quite as optimistic.

“There’s a lot of talk that the recession could last into 2010, and all through that period you’re going to have job loss and layoffs,” says Jonathan Miller, president of Miller Samuel, a Manhattan residential appraisal firm. “You’re going to see inventory build up, and it’ll still take another year or two to work off the inventory. This is a four-year scenario.”

In markets like Atlanta, or Sacramento, Calif., however, where prices are an affordable $151,300 and $212,000, respectively, it’s difficult to forecast a further rapid descent in prices. At that low of a price point for Atlanta, and with current 5.17% interest rates on 30-year fixed rate mortgages, it’s $828 a month to buy. That’s incentive enough to buy property. Median renters’ costs there, according to the Census Bureau American Community Survey, are $821 a month. Though the survey tracks data from 2005 through 2007, rents are likely similar today.

Throw in the build-up of home equity and the tax credit, and you can understand how motivated sellers can help put a floor under prices by enticing buyers with rock bottom prices. After all, you have to live somewhere

“Unlike stocks, housing has intrinsic value,” says Barry Ritholtz, chief market strategist of Ritholtz Research, a New York research firm. “Outside of Love Canal or Detroit, house prices do not go to zero.”